When most people think of real estate investing, rental properties and real estate investment trusts (REITs) are probably the first investments that come to mind. While these are popular ways to invest in and profit from real estate, they are by no means your only options, and they are not necessarily the best. This is especially true now that COVID-19 will be part of our world for the foreseeable future. Here are some of the best alternative real estate investments that deserve a second look today.
Key points to remember
- Rental properties and REITs are great investments, but there are many other ways to invest in real estate.
- Real estate partnerships can be a lucrative way to invest in real estate while minimizing risk.
- Impact investing offers a financial return while addressing a social or environmental problem.
- Hard money loans are issued by private lenders to help finance real estate projects.
- You can invest in yourself by learning a new skill or getting a license or certification.
Real estate investments and COVID-19
With millions of Americans out of work, many are struggling to pay their mortgage or rent. This can cause problems for rental property investors who rely on rental income to cover their own mortgages. This is also a problem for REIT investors who rely on the performance of mortgage-backed securities and income-producing real estate for dividends.
There is a lot of uncertainty about what will happen to the housing and rental markets over the next few months. Yet real estate remains an investment that can offer lower risk, better returns, and greater diversification than the stock market. Fortunately, there are many ways to invest in real estate.
Real estate partnerships (RELP)
In a real estate partnership (also called a “joint venture”), two or more investors combine their resources to work towards a common goal. Ideally, each partner brings something of value to the partnership, whether it’s existing property, money, expertise, or effort. By joining forces, investors can collectively spread risk, divide labor and improve potential outcomes.
âIn most partnerships, the sponsor plays an active role and has most of the decision-making rights,â says Tom Blake, founder of Flexible, a technology-based real estate company that offers a menu of options to help homeowners achieve their goals. âLimited partners or non-executive members have little or no control, but they share the cash flow and profits, depending on their investment and ownership. ”
This can give investors a source of passive income from real estate. âSince most investor partnerships have a passive role, investors can benefit from excellent risk-adjusted returns and little work, aside from the initial due diligence and reviewing regular status updates and sponsor reports, âsays Blake.
Real estate partnerships can be a welcome source of passive income for investors.
How to start
Real estate partnerships take many forms, including crowdfunding campaigns, written agreements between friends, limited liability companies (LLP), limited liability companies (LLC), and joint venture agreements (JV). Depending on the agreement, each partner (or category of partners) may be assigned a different priority and share of the investing cash flow. The options available to investors are determined by the opportunities offered by the sponsor and the risk and reward preferences of the investor.
For starters, you can partner with a trusted friend or associate or a third party. Flexible, for example, partners with homeowners who wish to remodel or remodel to increase value and cash flow. According to its website, âYou bring in the property, and we bring in the money, the plans, the engineers, the construction crews, the project managers and the designers,â so you don’t have to.
With any partnership, it is essential to seek legal advice when needed, to trust the sponsor, and to ensure that your goals are aligned with the sponsor’s business plan.
Impact investments aim to produce good financial returns as well as positive and measurable social and environmental impacts. According to the Global Impact Investing Network, the impact investing market provides capital to address challenges in a variety of sectors, including sustainable agriculture, renewable energy, conservation, and affordable and accessible basic services, including education, health care and housing.
Real estate impact investing – a subset of the impact investing industry – focuses on a variety of areas, including:
- Green real estateâThis strategy applies environmentally friendly practices to surpass current building standards in terms of energy and water efficiency, waste reduction and safe housing.
- Housing affordabilityâThis area focuses on providing housing inventories to underserved populations.
- Sustainable communityâThe goal is to design and build projects that serve as a foundation for the growth of the community.
Real estate represents a substantial percentage of total impact investing assets under management, up to 10% to 15%, or $ 27 billion to $ 40 billion, by some estimates.
How to start
Impact investors help finance a variety of projects, such as certified sustainable buildings, community buildings, and affordable housing, by investing in project-specific funds. To get started, find a company or investment fund that is focused on an area of ââimpact that interests you while offering an acceptable potential return. You can find these opportunities through your network, by attending meetings of local investor associations or by searching the Internet, for example, âaffordable housing impact fundâ.
For example, Verbhouse is an alternative real estate finance platform that combines rental and ownership through a lease-to-own option to make homeownership affordable and accessible to essential workers in high-cost communities (think San Francisco). Its Impact Investing Platform enables institutions such as universities and health systems to establish investment funds to provide faculty and staff with an affordable way to access homeownership in communities around the world. ‘they serve.
âImpact investors have the opportunity to generate social, environmental and economic results that might not otherwise be possible,â said Marjorie Scholtz, Founder and CEO of Verbhouse. âAs a result, impact investors can play a critical role in delivering concrete solutions. ”
Hard money loans
When an investor wants to renovate a property, they can get a hard money loan (also called a âbridging loanâ). These short term loans are issued by private investors or companies instead of banks. The lender typically uses the âafter repair valueâ (ARV) of the property, and not just the creditworthiness of the borrower, to determine whether to grant a loan. As an asset loan, the property serves as collateral.
Hard money loans can be a good option for investors who are looking for passive income with a little more return than other passive assets, such as bonds or dividend-paying stocks. It is important to know the borrower’s background and financial health, as well as their ability to weather storms, such as the one we are in now with COVID-19.
How to start
There is more to private money lending than just handing over cash. For example, you need to purchase title insurance, which protects your privilege as a lender and provides protection against counterfeiting. You should also review the borrower’s credit, validate the borrower’s property insurance, and always have a lawyer help you with the documentation.
To get started as a hard money lender:
- Decide how much money you can lend and where the money will come from.
- Find an investment opportunity by networking and attending meetings at your local investment associations (it is best to start with people you know and trust).
- Do your due diligence with the borrower and consider paying for a credit report and background check.
- Determine the terms of the loan, including the interest rate, type of interest, repayment period, closing costs, and whether there is a lump sum payment.
- Complete the documentation with the help of a competent lawyer.
- Start collecting and keeping meticulous records.
If you want to invest in real estate, it can pay off to get your real estate license, even if you don’t intend to work as a real estate agent, because of the variety of benefits it gives you. offer.
Invest in yourself
Another option to consider is investing in yourself by learning a new skill or getting a new license or certification that can improve your other real estate activities. For example, many real estate investors get a real estate license, not necessarily because they want to work as a real estate agent but to take advantage of benefits such as:
- MLS AccessâWith access to a Multiple Listing Service (MLS), you can find your next deal without having to rely on agents, colleagues or friends.
- Additional incomeâAs an agent, you can earn a commission on your real estate transactions. Depending on how many trades you execute each year, that money can add up.
- Networking-Getting your real estate license is an easy way to build your network, and having an extensive network can help you find and close more real estate deals.
- More controlâIf you represent yourself in a transaction, you have more control over the negotiations.
- Education and ResourcesâAt the very least, getting your real estate license could help you better understand the industry and help you learn the lingo.
There is no federal real estate license, so the time and money required to obtain your license will depend on your state’s licensing requirements. You can generally expect to spend three to six months to get your license, and it can cost around $ 1,000 to take the pre-license course and take the exam.
The bottom line
These are just a few of the many alternative ways to invest in real estate without going through the usual routes of buying REITs or becoming a homeowner. Of course, it’s essential that you do your homework and research your options before putting any money at risk. It is also best to consult with a qualified lawyer and tax specialist to avoid any legal and tax surprises with your alternative real estate investment.